According to data released by the RBI, bank deposits on the last reporting Friday of March 2023 stood at Rs 180 lakh crore – an increase of Rs 15.8 lakh crore from the previous year. Bank credit on March 24 stood at Rs 136.8 lakh crore, an increase of 17.8 lakh crore from a year earlier.
Using their existing funds to extend loans has resulted in the credit to deposit (CD) ratio of banks improving from 72.2% in March 2022 to 75.8% in March 2023. One of the reasons for the slower growth in the deposits was that banks were slow to increase the interest rates on their term deposits even as the 250-basis-point (100bps = 1 percentage point) increase in the repo rate pushed up costs for most borrowers almost immediately. Banks did not find the need to increase deposit rates as they started the year flush with funds on the back of various measures taken by the RBI to infuse liquidity during the pandemic.
The other reason for the sluggish growth in deposits is that people are increasing their cash holdings even after the waning of the pandemic in 2022. From Rs 30.4 lakh crore as on March 25, 2022, currency with the public has risen to Rs 32.8 lakh crore as on March 24 this year. This was on the back of a Rs 4-lakh-crore increase in currency in FY23 from Rs 27.5 lakh crore in March 2021.
The high CD ratio indicates that banks are running out of headroom from existing resources and will have to ramp up their deposits. According to analysts, this could be one of the reasons for the government to withdraw tax breaks on debt mutual funds, which were drawing significant amount of household and corporate savings. Some feel that this is also the reason for the government to not increase the interest rate on public provident fund – a key competitor to term deposits – even as it raised the returns on other small saving schemes.
The combined impact of tax on MFs and the higher returns offered by banks is expected to draw money into fixed deposits once again.